Nick Wright, BA JD MBA LLM (Tax)

Wright Business Law

Private investment fund managers in Canada face a recurring structural issue commonly referred to as the “dealer problem”: determining whether the fund, its general partner, or its management entity must register as a dealer under NI 31-103 ‘Registration Requirements, Exemptions and Ongoing Registrant Obligations’ when raising capital or administering investor transactions. Securities regulators emphasise that registration turns on whether the entity is “in the business” of trading securities. While this standard is well known, its application to fund structures is uneven across market participants and remains the most frequent compliance blind spot for emerging managers.

Understanding the business trigger matters because dealer registration carries significant regulatory burdens such as capital requirements, insurance, compliance systems, proficiency expectations, and ongoing filings that many new and emerging funds are not designed to absorb. Conversely, failing to register when required risks serious outcomes including cease-trade orders, forced unwinds, and administrative penalties. This article explains how regulators have applied the test to funds, what grey areas persist, and how to structure operations to mitigate risk.

Regulatory Framework & Sources of Law

Dealer registration in Ontario is governed primarily by the Securities Act (Ontario) and NI 31-103. Section 25 of the Securities Act (Ontario) prohibits any person from engaging in the business of trading in securities unless registered as a dealer or acting as a dealing representative on behalf of a dealer, unless otherwise exempt from the requirement. For investment funds, registration obligations may attach to the fund itself, the GP, the manager, or an affiliated entity, depending on who is conducting the activity and whose name appears in the subscription process.

Regulators’ primary interpretive framework remains the “business trigger” analysis described in the NI 31-103 Companion Policy: 31-103CP, s. 1.3. They apply a functional analysis rather than a formal one. The character, frequency, and commercial context of the activities determine whether a person is “in the business” of trading. Ontario Securities Commission (OSC) tribunal decisions involving capital raising intermediaries, unregistered dealers, and fund distribution structures illustrate how the analysis is applied, although decisions dealing specifically with investment fund distribution structures remain relatively limited and many regulatory outcomes appear in settlement agreements or other non-precedential proceedings.

NI 45-106 overlays this framework by providing the prospectus exemptions under which funds typically issue securities. However, compliance with a prospectus exemption does not eliminate the separate obligation to comply with dealer registration requirements. This distinction remains a frequent misconception for new fund managers.

Definitions & Thresholds

The core term is “trade” as defined in Securities Act (Ontario), s. 1(1), which includes any sale or disposition of a security for value, any act, advertisement, solicitation, or conduct directly or indirectly in furtherance of a trade. The definition is intentionally broad enough to capture most capital raising activity.

The “business trigger” is not a statutory concept but is central to determining whether someone is required to register as a dealer. Factors in the companion policy to NI 31-103 include whether the person:

• solicits securities transactions;
• engages repeatedly or regularly in trading;
• receives compensation tied to trading;
• holds themselves out as being in the business of trading.

There is no monetary threshold or safe harbour based on fund size or number of investors. A small first-time fund can trigger dealer registration requirements just as readily as a large institutional fund if the activities fit the business criteria.

Investment funds also must distinguish their roles under NI 31-103: the “investment fund manager” (IFM), the portfolio manager (PM), and the dealer functions. Being registered or exempt as an IFM or PM does not exempt an entity from the dealer requirement if it conducts distribution activity.

Application in Practice

In practice, most Canadian private funds are raised under NI 45-106 prospectus exemptions, typically the Accredited Investor or Offering Memorandum exemptions. The GP, manager, or a special-purpose entity typically conducts the capital raising. To determine whether dealer registration is required, regulators expect an assessment of the business trigger at the level of the entity interacting with investors.

Where a manager’s capital raising is limited to a small number of investors with whom principals have pre-existing relationships, where no separate compensation is paid for distribution, and where solicitation is limited and not marketed broadly, regulators generally accept that the manager is not “in the business” of trading. However, this is not a formal exemption and not an entitlement. It is an assessment of risk under NI 31-103 that requires documentation.

Emerging funds often stumble in continuous offerings when subscriptions occur repeatedly over time. Continuous or rolling capital calls, reinvestment mechanics, secondary purchases, and redemptions all involve securities transactions that can cumulatively meet the business trigger. In such cases, fund managers often engage a third-party registered exempt market dealer (EMD) or register an affiliated entity as an EMD to perform distribution functions.

Cross-border fundraising adds complexity. The international dealer exemption under s. 8.18 of NI 31-103 is narrow and primarily intended for foreign dealers dealing with Canadian permitted clients in foreign securities. It seldom applies to private fund units issued by a Canadian or Ontario-based fund. Consequently, foreign managers often rely on the “not in the business” analysis but should obtain jurisdiction-specific advice.

Grey Areas & Regulator Focus

Regulators have focused in recent years on unregistered capital raising by private issuers, including funds. OSC staff have observed that reliance on the “not in the business” carve-out is often overclaimed and under-supported. They also emphasise that compensation structures that reward or incentivize capital raising activity can be relevant to the business trigger.

Another area of scrutiny involves marketing practices. Fund managers that deploy structured marketing campaigns, maintain investor pipelines, use lead-generation platforms, or engage third-party finders risk being viewed as engaging in dealer activity, even if transactions are technically solicited by the GP. Regulators are increasingly critical of placement agent arrangements when no Canadian dealer is involved.

Redemptions and reinvestments also sit in a grey zone. While investor-initiated redemptions may not always constitute trading by the fund, fund-driven redemption programs, internal secondary transactions, or automatic reinvestment plans can constitute trades. Managers often underestimate how these operational mechanics cumulatively indicate a business of trading.

Interactions with Adjacent Regimes

Dealer registration intersects with several adjacent regulatory regimes relevant to funds.

The investment fund manager (IFM) registration requirement under NI 31-103 applies where an entity directs the business, operations, or affairs of an investment fund. Many private funds fall outside the definition of ‘investment fund’ where they actively manage or control portfolio businesses (for example development or operating real estate projects). Other structures such as credit funds, evergreen funds, and fund-of-funds may qualify as investment funds, which can trigger IFM registration unless an exemption applies.

Notably, prospectus exemptions under NI 45-106 govern the distribution of fund units but do not affect the dealer analysis. A fund can validly rely on the Accredited Investor exemption while the manager violates registration requirements.

Finally, anti-money laundering obligations under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act apply irrespective of dealer registration and must be integrated into onboarding processes.

Illustrative Scenarios

Consider a first-time venture fund targeting twenty investors, all accredited, with principals personally soliciting and no marketing materials distributed beyond a confidential deck. No compensation is tied directly to capital raising. In this case, the GP may not be considered “in the business” of trading, particularly if fundraising is episodic and relationship driven. However, if the GP undertakes multiple closings and markets broadly at conferences, the business trigger may be met.

A real estate fund conducts continuous offerings, allowing new investors to subscribe quarterly as properties are acquired. The manager’s management fee is tied to committed capital. Investor solicitation is ongoing and the fund markets actively through digital channels. This structure will likely be viewed as engaging in the business of trading, making EMD registration or engagement of a third-party EMD advisable.

A foreign private equity fund markets into Canada from the United States relying on pre-existing relationships. While the international dealer exemption seldom applies, the manager may not be considered in the business of trading in Canada if all substantive solicitation occurs outside Canada and only a handful of Canadian investors participate. However, this assessment must be carefully documented and may vary by province.

Compliance Checklist

• Conduct a documented business trigger analysis to assess whether the fund’s activities likely constitute trading in securities as a business.
• Map all investor touchpoints, including marketing, meetings, onboarding, and subscription execution.
• Review compensation structures to ensure remuneration is not tied to capital raising.
• Assess continuous offering mechanics, including multiple closings, reinvestments, redemptions, and repeated issuance activity.
• Confirm the registration status of intermediaries involved in distribution.
• Implement policies and procedures governing investor communications and who may discuss the fund with investors.
• Reassess periodically, particularly when launching successor funds or changing capital raising strategies.

What’s Changing

CSA discussions on registration reform have periodically addressed the application of the ‘business trigger’ in private markets. While regulators continue to examine how dealer registration applies to issuers and fund managers raising capital under prospectus exemptions, no formal proposals for a dedicated exemption for private funds distributing solely to accredited investors have been advanced. At the same time, OSC compliance reviews have increasingly focused on potential unregistered dealer activity in private markets, and several enforcement matters have involved private fund managers or principals participating in distributions without registration.

Conclusion & Next Steps

Avoiding the dealer problem requires more than simply relying on the Accredited Investor exemption. Managers must undertake a rigorous, fact-specific assessment of capital raising and ongoing investor-facing activities, document their reasoning, and update compliance systems as operations evolve. For some funds, particularly those engaged in continuous offerings or broad marketing efforts, engaging or becoming a registered dealer is the prudent choice. For others, a ‘not in the business’ analysis may be appropriate if carefully controlled and supported by evidence. Early legal input is critical because structural decisions made at formation often determine regulatory exposure for the life of the fund.

Book a Consultation

If you are forming, restructuring, or operating a private investment fund in Canada or considering NI 31-103 registration, contact us to schedule an initial consultation with Nick Wright.